The Governing Council of the ECB met yesterday and announced further monetary stimulus, primarily through the pandemic emergency purchase programme (PEPP) and targeted long-term refinancing operations (TLTRO), motivated by concerns that the pandemic might have a longer-lasting economic impact.
Minutes of October’s meeting already set the agenda for this week’s ECB Governing Council meeting. On the back of virus and lockdown resurgence, renewed slowdown in growth momentum and weaker underlying inflation, shifted the balance or risks further to the downside. This drove expectations for additional monetary easing during the December meeting. The minutes clearly signalled that the Governing Council was waiting for an updated assessment of economic outlook and balance of risk to “recalibrate all of its instruments, as appropriate, to ensure that financing conditions remained favourable to support the economic recovery and counteract the negative impact of the pandemic on the projected inflation path”.
In yesterday’s meeting, ECB President Lagarde outlined the expectations for an economic contraction of 7.3% in 2020 to then rebound by 3.9% and 4.2% in 2021 and 2022, respectively. Despite the stronger projected growth in 2022, the inflation outlook shows a more subdued pick up in inflation compared to three months ago. The updated macroeconomic projections expect the HICP inflation to gradually increase from the forecasted rate of 1% in 2021 to 1.1% in 2022 and 1.4% in 2023, well below the ECB’s inflation target of below, but close to, 2% over the medium term. While expressing concerns about the near term contraction, the covid-19 vaccine discovery boosts confidence to the recovery outlook in 2021.
In line with expectations, monetary policy support remained accommodative with policy rates and tiering system unchanged. ECB President Lagarde announced that the interest rates on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0%, 0.25% and -0.50%, respectively.
With rates already below zero, the ECB continued to expand its stimulus through the PEPP, the stimulus launched in March to counter the impact of the covid-19 pandemic on the euro area economy. In yesterday’s meeting, the Governing Council of the ECB decided to expand the programme by €500 billion to €1,850 billion and extend the horizon for net purchases to at least the end of March 2022. The ECB maintained its stance to continue to conduct net purchases throughout the covid-19 crisis. Reinvestment of matured securities purchases under this program was also extended to at least the end of 2023.
Modification of parameters to the third set of Targeted longer-term refinancing operations (TLTRO III) were also on the ECB meeting’s agenda. TLTROs enable more favourable lending conditions to banks which incentives them further to lend to the real economy, and therefore passing the stimulus to euro area households and firms. The stimulus was further recalibrated on three fronts: duration for favourable interest rates extended by twelve months to June 2022, further additional three year operations announced and the amount that can potentially be borrowed increased from 50% to 55% of eligible loans.
In a nutshell, the ECB meeting had one key agenda: to continue to ensure favourable financial conditions, defined holistically to include lending rates, yields and volumes for households, corporates and sovereigns, during the pandemic crisis. ECB President Lagarde gave her assurance that the ECB retains the flexibility to “adjust its purchases on what is needed to maintain those favourable financing conditions”.
This article was written by Rachel Meilak, CFA, Equity Analyst at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd which is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.
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